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WSFS > SEC Filings for WSFS > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for WSFS FINANCIAL CORP


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

WSFS Financial Corporation is parent to Wilmington Savings Fund Society, FSB ("WSFS Bank" or the "Bank"), one of the ten oldest banks continuously operating under the same name in the United States. A permanent fixture in the community, WSFS has been in operation for more than 180 years. In addition to its focus on stellar customer service, the Bank has continued to fuel growth and remain a leader in our community. We are a relationship-focused, locally-managed, community banking institution that has grown to become the largest thrift holding company in the State of Delaware, one of the top commercial lenders in the state, the third largest bank in terms of Delaware deposits. We state our mission simply: We Stand for Service and Strengthening Our Communities.

Our core banking business is commercial lending funded by customer-generated deposits. We have built a $2.2 billion commercial loan portfolio by recruiting the best seasoned commercial lenders in our markets and offering a high level of service and flexibility typically associated with a community bank. We fund this business primarily with deposits generated through commercial relationships and retail deposits. We service our customers primarily from our 51 offices located in Delaware (42), Pennsylvania (7), Virginia (1) and Nevada (1). We also offer a broad variety of consumer loan products, retail securities and insurance brokerage through our retail branches.

We have two consolidated subsidiaries, WSFS Bank and Montchanin Capital Management, Inc. ("Montchanin") and one unconsolidated affiliate, WSFS Capital Trust III ("the Trust").

WSFS Bank has two wholly owned subsidiaries, WSFS Investment Group, Inc. and Monarch Entity Services, LLC ("Monarch"). WSFS Investment Group, Inc., markets various third-party investment and insurance products, such as single-premium annuities, whole life policies and securities primarily through the Bank's retail banking system and directly to the public. Monarch provides commercial domicile services which include employees, directors, sublease of office facilities and registered agent services in Delaware and Nevada.

Our Cash Connect division is a premier provider of ATM Vault Cash and related services in the United States. Cash Connect manages nearly $437 million in vault cash in nearly 13,000 ATMs nationwide and also provides online reporting and ATM cash management, predictive cash ordering, armored carrier management, ATM processing and equipment sales. Cash Connect also operates over 430 ATMs for WSFS Bank, which has, by far, the largest branded ATM network in Delaware.

We offer trust and wealth management services through Christiana Trust, Cypress Capital Management, LLC (Cypress), WSFS Investment Group brokerage and our Private Banking group. The Christiana Trust division provides investment, fiduciary, agency and commercial domicile services from locations in Delaware and Nevada and has over $15 billion in assets under administration. These services are provided to individuals and families as well as corporations and institutions. The Christiana Trust division of WSFS Bank provides these services to customers locally, nationally and internationally making use of the advantages of its branch facilities in Delaware and Nevada. Cypress is an investment advisory firm that manages over $600 million of portfolios for individuals, trusts, retirement plans and endowments. WSFS Investment Group, Inc. markets various third-party insurance products and securities through the Bank's retail banking system.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, and exhibits thereto, contains estimates, predictions, opinions, projections and other statements that may be interpreted as "forward-looking statements" as that phrase is defined in the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, references to our financial goals, management's plans and objectives for future operations, financial and business trends, business prospects, and management's outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations. Such forward-looking statements are based on various assumptions (some of which may be beyond the Company's control) and are subject to risks and uncertainties (which change over time) and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include, but are not limited to, those related to the economic environment, particularly in the market areas in


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which we operate, including an increase in unemployment levels; the volatility of the financial and securities markets, including changes with respect to the market value of financial assets; changes in market interest rates may increase funding costs and reduce earning asset yields thus reducing margins, changes in government regulation affecting financial institutions, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules being issued in accordance with this statute and potential expenses and elevated capital levels associated therewith; possible additional loan losses, impairment of the collectability of loans; possible changes in trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies, and similar organizations, may have an adverse effect on business; possible regulations issued by the Consumer Financial Protection Bureau or other regulators which might adversely impact our business model or products and services; possible stresses in the real estate markets, including possible continued deterioration in property values; our ability to expand into new markets and to maintain profit margins in the face of competitive pressures; our ability to effectively manage credit risk, interest rate risk market risk, operational risk, legal risk, liquidity risk, reputational risk, and regulatory and compliance risk; the effects of increased competition from both banks and non-banks; the effects of geopolitical instability and risks such as terrorist attacks; the effects of weather and natural disasters such as floods, droughts, wind, tornados and hurricanes, and the effects of man-made disasters; possible changes in the speed of loan prepayments by our customers and loan origination or sales volumes; possible acceleration of prepayments of mortgage-backed securities due to low interest rates, and the related acceleration of premium amortization on those securities; and the costs associated with resolving any problem loans, litigation and other risks and uncertainties, discussed in documents filed by us with the Securities and Exchange Commission from time to time. Forward looking statements are as of the date they are made, and the Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the financial condition and results of operations are based on the Consolidated Financial Statements, which are prepared in conformity with U.S. generally accepted accounting principles. The preparation of these Consolidated Financial Statements requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenue and expenses. We regularly evaluate these estimates and assumptions including those related to the allowance for loan losses, deferred taxes, fair value measurements, goodwill and other intangible assets. We base our estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Although our current estimates contemplate current economic conditions and how we expect them to change in the future, for the remainder of 2012, it is reasonably possible that actual conditions may be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Actual results may differ from these estimates under different assumptions or conditions.

The following are critical accounting policies that involve more significant judgments and estimates. See further discussion of these critical accounting policies in our 2011 Annual Report on Form 10-K.

Allowance for Loan Losses

We maintain allowances for loan losses and charge losses to these allowances when realized. We consider the determination of the allowance for loan losses to be critical because it requires significant judgment reflecting our best estimate of impairment related to specifically evaluated impaired loans as well as the inherent risk of loss for those in the remaining loan portfolio. Our evaluation is based upon a continuing review of the portfolio, with consideration given to evaluations resulting from examinations performed by regulatory authorities.

Deferred Taxes

We account for income taxes in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740, Income Taxes ("ASC 740"), which requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We consider our accounting policies on deferred taxes to be critical because we regularly assess the need for valuation allowances on deferred income tax assets that may result from, among other things, limitations imposed by Internal Revenue Code and uncertainties, including the timing of settlement and realization of these differences. No valuation allowance is required as of September 30, 2012.


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Fair Value Measurements

We adopted FASB ASC 820-10 Fair Value Measurements and Disclosures ("ASC 820"), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. We consider our accounting policies related to fair value measurements to be critical because they are important to the portrayal of our financial condition and results, and they require our subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. See Note 7, Fair Value Disclosures of Financial Assets to our Consolidated Financial Statements.

Goodwill and Other Intangible Assets

In accordance with FASB ASC 805, Business Combinations, and FASB ASC 350, Intangibles-Goodwill and Other, all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-lived intangibles and other intangibles are recorded at fair value. We consider our accounting policies related to goodwill and other intangible assets to be critical because the assumptions or judgment used in determining the fair value of assets and liabilities acquired in past acquisitions are subjective and complex. As a result, changes in these assumptions or judgment could have a significant impact on our financial condition or results of operations.

For additional information regarding our goodwill and other intangible assets, see Note 11 to the Consolidated Financial Statements.

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

Financial Condition

Our total assets decreased $27.7 million, or less than 1%, to $4.3 billion during the nine months ended September 30, 2012. Included in this decrease was a $46.4 million, or 2%, decrease in net loans resulting from our second quarter 2012 Asset Strategies efforts, and a $20.9 million, or 4%, decrease in cash and cash equivalents mainly due to the seasonal decrease in cash in non-owned ATMs and the use of cash from other institutions in Cash Connect's ATM Vault Cash business. Partially offsetting these decreases, investment securities increased $50.7 million, or 6%, and loans held-for-sale increased by $10.7 million during the nine months ended September 30, 2012.

Total liabilities decreased $53.3 million during the nine months ended September 30, 2012 to $3.8 billion. This decrease was primarily the result of decreased Federal Home Loan Bank advances of $145.8 million, or 27%, as a result of net repayments. Partially offsetting these decreases was a $50.0 million increase in federal funds purchased and a $50.1 million increase in total customer deposits. Deposit growth included a $70.8 million increase in noninterest-bearing demand accounts, a $23.5 million increase in interest bearing demand accounts and a $20.5 million increase in savings accounts. These core deposit account increases were partially offset the purposeful decreases of $58.3 million in high-cost, non-core customer time accounts and a $25.6 million decrease in brokered CDs.

Capital Resources

Stockholders' equity increased $25.7 million between December 31, 2011 and September 30, 2012. This increase was mainly due to net income of $23.8 million combined with an increase of $6.1 million in the value of our available-for-sale securities portfolio. Partially offsetting these increases was the payment of common and preferred dividends of $5.1 million during the nine months ended September 30, 2012.

Book value per common share was $47.84 at September 30, 2012 an increase of $2.65 from $45.19 reported at December 31, 2011. Tangible common book value per common share (a non-GAAP measurement) was $37.99 at September 30, 2012, an increase of $2.79, or 8% from $35.20 reported at December 31, 2011.


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Below is a table comparing the Bank's consolidated capital position to the minimum regulatory requirements as of September 30, 2012:

                                                                                                      To be Well-Capitalized
                                               Consolidated                 For Capital              Under  Prompt Corrective
                                               Bank Capital              Adequacy Purposes               Action Provisions
                                                          % of                         % of                               % of
(Dollars in Thousands)                      Amount       Assets         Amount        Assets           Amount            Assets
Total Capital (to Risk-Weighted Assets)    $ 458,242       14.28 %    $   256,771        8.00 %    $      320,964          10.00 %
Core Capital (to Adjusted Total Assets)      418,043        9.91          168,779        4.00             210,974           5.00
Tangible Capital (to Tangible Assets)        418,043        9.91           63,292        1.50                 N/A            N/A
Tier 1 Capital (to Risk-Weighted Assets)     418,043       13.02          128,386        4.00             192,578           6.00

Under guidelines issued by banking regulators, savings institutions such as the Bank must maintain certain capital levels in order to be considered adequately capitalized. The thresholds for being considered adequately capitalized are outlined in the table above. Failure to meet minimum capital requirements can initiate certain mandatory actions and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our bank's financial statements.

At September 30, 2012, the Bank was in compliance with regulatory capital requirements and was considered a "well-capitalized" institution. The Bank's core capital ratio of 9.91%, Tier 1 capital ratio of 13.02% and total risk based capital ratio of 14.28%, all remain substantially in excess of "well-capitalized" regulatory benchmarks, the highest regulatory capital rating. In addition, and not included in Bank capital, the holding company held $61.2 million in cash to support dividends, acquisitions, strategic growth plans.

Liquidity

We manage our liquidity and funding needs through our treasury function and our Asset/Liability Committee. We have a policy that separately addresses liquidity, and management monitors our adherence to policy limits. Also, liquidity risk management is a primary area of examination by the banking regulators.

As a financial institution, the Bank has ready access to several sources to fund growth and meet its liquidity needs. Among these are: net income, retail deposit generation, loan repayments, borrowing from the FHLB, repurchase agreements, access to the Federal Reserve Discount Window, and access to the brokered deposit market as well as other wholesale funding avenues. In addition, we have a large portfolio of high-quality, liquid investments, primarily short-duration mortgage-backed securities and government sponsored enterprises ("GSE") notes that provide a near-continuous source of cash flow to meet current cash needs, or can be sold to meet larger discrete needs for cash. Management believes these sources are sufficient to maintain required and prudent levels of liquidity.

During the nine months ended September 30, 2012, cash and cash equivalents decreased $20.9 million to $447.1 million. This decrease was primarily a result of the following: cash used for $145.8 million for net repayments of FHLB advances; $38.2 million increase in net loans; $28.3 million net increase in investment securities available for sale and a $30.0 million repayment of unsecured bank debt. Offsetting these decreases in cash were: $63.3 million increase in cash provided by operating activities; $53.1 million increase from the issuance of senior notes during the third quarter of 2012; $50.0 million increase in cash provided through an increase in federal funds purchased; $42.1 million net increase in deposits and $11.8 million increase from the sales of assets acquired through foreclosure.


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NONPERFORMING ASSETS

The following table shows our nonperforming assets and past due loans at the dates indicated. Nonperforming assets include nonaccruing loans, nonperforming real estate, assets acquired through foreclosure and restructured mortgage and home equity consumer debt. Nonaccruing loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and the value of the collateral is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management's assessment of the ultimate collectability of principal and interest. Past due loans are loans contractually past due 90 days or more as to principal or interest payments but which remain on accrual status because they are considered well secured and in the process of collection.

                                                          September 30,             December 31,
                                                              2012                      2011
                                                                      (In Thousands)
Nonaccruing loans:
Commercial                                               $         3,579           $       23,080
Owner-occupied commercial (1)                                     13,324                       -
Consumer                                                           5,188                    1,018
Commercial mortgage                                                5,875                   15,814
Residential mortgage                                               9,354                    9,057
Construction                                                       2,620                   22,124

Total nonaccruing loans                                           39,940                   71,093
Assets acquired through foreclosure                                6,996                   11,695
Troubled debt restructuring (accruing)                            10,189                    8,887

Total nonperforming assets                               $        57,125           $       91,675

Past due loans (2):
Residential mortgages                                                 -                       887
Commercial and commercial mortgage                                 1,869                       78

Total past due loans                                     $         1,869           $          965

Ratios:
Allowance for loan losses to total loans (3)                        1.69 %                   1.92 %
Nonperforming assets to total assets                                1.34 %                   2.14 %
Nonaccruing loans to total loans (3)                                1.48 %                   2.58 %
Loan loss allowance to nonaccruing loans                          114.17 %                  74.66 %
Loan loss allowance to total nonperforming assets                  79.82 %                   57.9 %

(1) Prior to 2012, owner-occupied loans were included in commercial loan balances.

(2) Past due loans are accruing loans which are contractually past due 90 days or more as to principal or interest. These loans are well secured and in the process of collection.

(3) Total loans exclude loans held for sale.


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Nonperforming assets decreased $34.6 million between December 31, 2011 and September 30, 2012. As a result, non-performing assets as a percentage of total assets decreased from 2.14% at December 31, 2011 to 1.34% at September 30, 2012. This significant reduction was mainly due to the successful efforts of our "Asset Strategies" during the second quarter of 2012. In addition, during the third quarter a total of $8.0 million was collected or paid down through additional note sales and ongoing asset management activities. Lastly, as the result of recent OCC guidance, during the third quarter of 2012, $4.7 million of loans were reclassified from performing loans to nonaccrual status (consisting of $2.5 million of residential mortgages and $2.2 million of consumer loans). For additional information on this reclass, see the "Allowance for Loan Losses" section of this Management Discussion and Analysis.

The following table summarizes the changes in nonperforming assets during the period indicated:

                                          For the nine             For the year
                                          months ended                 ended
                                       September 30, 2012        December 31, 2011
                                                     (In Thousands)
 Beginning balance                    $             91,675      $            92,898
 Additions                                          55,321                   89,842
 Collections                                       (40,559 )                (40,695 )
 Collections from loan dispositions                (14,305 )                     -
 Transfers to accrual                                 (552 )                 (8,474 )
 Charge-offs / write-downs, net                    (34,455 )                (41,896 )

 Ending balance                       $             57,125      $            91,675

The timely identification of problem loans is a key element in our strategy to manage our loan portfolio. Timely identification enables us to take appropriate action and, accordingly, minimize losses. An asset review system established to monitor the asset quality of our loans and investments in real estate portfolios facilitates the identification of problem assets. In general, this system utilizes guidelines established by federal regulation.

INTEREST SENSITIVITY

The matching of maturities or repricing periods of interest rate-sensitive assets and liabilities to promote a favorable interest rate spread and mitigate exposure to fluctuations in interest rates is our primary tool for achieving our asset/liability management strategies. We regularly review our interest-rate sensitivity and adjust the sensitivity within acceptable tolerance ranges established by the Board of Directors. At September 30, 2012, interest-earning assets exceeded interest-bearing liabilities that mature or reprice within one year (interest-sensitive gap) by $133.3 million. Our interest-sensitive assets as a percentage of interest-sensitive liabilities within the one-year window increased from 102.8% at December 31, 2011, to 106.2% at September 30, 2012. Likewise, the one-year interest-sensitive gap as a percentage of total assets changed to 3.13% at September 30, 2012 from 1.54% at June 30, 2012. The change in sensitivity since December 31, 2011 reflects our continuing effort to effectively manage interest rate risk and positions us to improve our net interest margin in a rising rate environment.

Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in our lending, investing, and funding activities. To that end, we actively monitor and manage our interest rate risk exposure. One measure, required to be performed by Federal regulation, measures the impact of an immediate change in interest rates in 100 basis point increments on the net portfolio value ratio. The economic value of equity ratio is defined as the economic value of the estimated cash flows from assets and liabilities as a percentage of economic value of cash flows from total assets.


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The table below shows the estimated impact of immediate changes in interest rates on our net interest margin and net portfolio value ratio at the specified levels at September 30, 2012 and December 31, 2011:

                             September 30, 2012           December 31, 2011
          % Change in     % Change in     Economic    % Change in     Economic
         Interest Rate    Net Interest    Value of    Net Interest    Value of
         (Basis Points)    Margin (1)    Equity (2)    Margin (1)    Equity (2)
              +300             8%          12.38%          6%          11.17%
              +200             3%          12.52%          3%          11.30%
              +100            -2%          12.34%         -2%          11.21%
               -               0%          12.03%          0%          10.97%
              -100             0%          11.23%          1%          10.19%
            -200(3)           NMF           NMF           NMF           NMF
            -300(3)           NMF           NMF           NMF           NMF

(1) The percentage difference between net interest margin in a stable interest rate environment and net interest margin as projected under the various rate change environments.

(2) The economic value of equity ratio in a stable interest rate environment and the economic value of equity ratio as projected under the various rate change . . .

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